When interest rates on 30-year fixed mortgages rise, as they are now, borrowers tend to opt for adjustable-rate mortgages, which can help them pay less in the early stages of a home purchase or potentially get more bang for their buck when they buy a home.ARMs start out with lower interest rates, and then the rates adjust upward after a few years.

But as of July 5, ARMs were averaging 6.5 percent to 7.21 percent (depending on the loan), almost equal to the average 30-year fixed rate of 6.95 percent, according to Bankrate, a consumer financial services company. This means that most homebuyers won't save on their monthly payments in the first few years of the loan, and they will still be taking the risk that the Federal Reserve will continue to keep interest rates high later.

The waning appeal of ARMs is another blow to the countless homebuyers who have been pushed out of the market by high mortgage rates and lack of affordable housing. People who want to buy a home but can't afford it now have even fewer tools.

"Choosing an ARM over a 30-year fixed rate now is purely a gamble on lower interest rates, as the initial interest rate advantage has virtually disappeared," said Greg McBride, Bankrate's chief financial analyst.

A better option, McBride says, is to lock in a 30-year fixed-rate mortgage and refinance if rates fall.

The popularity of ARMs usually ebbs and flows with interest rates. This time is no exception.

Last year, ARMs were more attractive when they saved homebuyers more money. As of July 6, 2022, the average interest rate on a 30-year fixed-rate mortgage was 5.55 percent, and the average interest rate on an adjustable mortgage ranged from 4.19 to 5.46 percent, according to Bankrate's survey of the nation's large lenders.

Homebuyers have noticed that fewer people are choosing ARMs.

About 6 percent of mortgage applications filed during the week ending June 30 were for ARMs, down from about 10 percent during the same week last year, according to the Mortgage Bankers Association.

Typically, long-term rates are higher than short-term rates.ARMs have shorter initial terms than 30-year mortgages (typically five, seven or 10 years before rate adjustments), which means their starting rates are usually lower. But for months, the yield curve has inverted - typically, short-term rates are higher than long-term rates. This has taken the edge off ARMs.

That could put them ahead of homebuyers who get 30-year fixed mortgages and could have to pay thousands of dollars in closing costs if they want to refinance, said Robert Heck, senior vice president of Morty, an online mortgage marketplace.

ARMs were one of the many factors that fueled the 2008-2009 financial crisis, when lenders offered ultra-low teaser rate loans to subprime borrowers. In the ensuing housing crisis, millions of foreclosures showed that many homebuyers were not ready for interest rate adjustments.

Today's ARMs are different, with enhanced protections for borrowers, but there are still risks.

Some buyers who plan to sell their homes before ARM rates reset in a few years, or those looking to flip properties for investment purposes, are still choosing ARMs, financial planners say.

If rates fall during the reset, those who choose ARMs may get lower rates, Heck said, which could put them ahead of buyers who get 30-year fixed mortgages and may have to pay thousands of dollars in closing costs if they want to refinance.

ARMs are also more popular today with buyers of higher-priced homes, said Todd Johnson, senior vice president of Wells Fargo's home lending division. A slightly lower interest rate could mean more savings for the fixed portion of a larger loan.

For example, a $2 million ARM loan with a 6.25 percent interest rate and a 10-year fixed term that resets every six months thereafter would mean a monthly payment of about $12,314, Johnson said. If the homebuyer has good credit and puts 20 percent down, the monthly payment on a 30-year fixed-rate mortgage would be about $12,641 at 6.5 percent.

This represents a monthly savings of about $327.

Mike Fratantoni, chief economist for the Mortgage Bankers Association, said ARMs may become more attractive to homebuyers when the Fed eventually cuts short-term rates.

Most homebuyers need to feel that ARM savings are enough to offset the certainty of monthly payments on a 30-year fixed-rate loan, he said.

If necessary, homebuyers should still be able to afford the maximum interest rate on an ARM, even if they lose their jobs, says Modi's Heck.